JOURNALS OF ROBERT MAAS

Wednesday, September 17, 2014

BACK FROM THE USA

I have recently
returned from my annual trip to Chicago.
It’s not just that its my favourite City. I go every year for the Midwest Accounting
show and stay over for the Chicago Jazz Festival.

The
Accounting Show is really more of a conference with show stands rather than
simply a show. It is a two-day event and
you get to choose your seminar sessions from a large menu. The Show is my annual update on what is
happening in the US tax world.

However I
also listen to other talks. This year
there was a presentation on the state of the Illinois economy. Unsurprisingly the speaker was upbeat. Some of the statistics impressed me,
particularly that Chicago is number two in the US for attracting foreign
investment. Some were less impressive,
such as Chicago accounts for 93% of all Illinois exports, whereas in 2009 it
accounted for only 55% (which suggests that the rest of Illinois is struggling)
and that it ranks only 31st in tax-friendly States.

But what
stuck in my mind is that none of the speakers mentioned the number of graduates
from Illinois’ eight universities. They
referred only to STEM graduates. I had
never heard of a STEM graduate before.
STEM degrees are apparently degrees in Science, Technology, Engineering
and Maths. Illinois has had a 42%
increase in STEM graduates over the last 10 years, but local businesses such as
Microsoft are worried that there are not enough. Currently when looking to invest, Chicago is
Microsoft’s fourth choice (after California, Seattle and New York). The problem is that there is a shortage of
qualified labour. Some Chicago
businesses are introducing scholarships in engineering at High School level to encourage
pupils to study STEM subjects in university.

Foreign
nationals who study at Chicago universities are five times more likely to
invest in Chicago than elsewhere.

This
contrasts with the UK where we seem to be interested primarily in turning out
graduates full-stop. English graduates,
History graduates, Media Studies graduates, we seem to value them exactly the
same as STEM graduates. And yet, like
Chicago, the UK has a lot of unemployment and a lack of skilled labour so we
are having to bring in the skilled labour from overseas. Wouldn’t it be a lot more sensible to take
the Chicago route and concentrate on producing STEM graduates rather than
anything graduates, particularly if the Chicago experience is that it is the
STEM graduates who later in life are the people who decide where to locate
branches of the businesses they join.

While in the
States I read a press release from Rep Kowalko of Delaware. He wants Congress to stop criminals from
hiding behind Delaware companies! He
explains that Delaware “is a leader in incorporation”. He doesn’t point out that this is because of
a combination of non-disclosure laws and the absence of State corporate
tax. He thinks that labels such as “US
Shell Corporation Capital”, “corporate tax haven” and “the new Cayman Islands”,
“besmirch Delaware’s image”. He does not
want that to be Delaware’s reputation or Delaware’s reality”. However he accepts that when fraudsters “take
advantage of Delaware’s laws to create anonymous shell companies to launder
money for illegal purposes, our state has a real problem that needs to be
addressed”.

His
solution? Don’t expect Delaware to do
anything about it! We value our
competitive advantage! Instead Congress
should force all 50 States “to require companies from all 50 States to disclose
their real, living and breathing beneficial owners when they incorporate and
keep this information up to date”. Not
of course to make this information public, as roughly 47 of the 50 States
already do, but so that “law enforcement could subpoena information about the
natural person (or persons) behind a company without tipping off that company
or running into a dead end”.

How’s that
for bare-faced cheek!

Most people
outside Delaware think that, as the US and other G20 countries increasingly
pressurise small islands to disclose more and more information to developed
countries against the threat of economic sanctions by the G20, Delaware is fast
becoming the only place in the world where secrecy is guaranteed. That’s a little bit unfair to Delaware as I
keep getting e-mails from a company in Wyoming telling me that Wyoming is even
more secretive than Delaware!

Monday, September 08, 2014

SIMPLIFICATION

The
government frequently talks about simplifying tax. So what does simplification mean? In June HMRC issued a consultation document,
“Employee Benefits and Expenses – Trivial Benefits Exemption”.

This
proposes a new exemption for trivial benefits.
Well, that sounds like simplification doesn’t it? It explains that examples of benefits in kind
that “HMRC accepts as trivial include a small gift (such as a bouquet of
flowers) given to an employee to celebrate a personal event, such as the birth
of a child, or small items, such as a box of chocolates, given to an employee
at Christmas”.

I don’t want
to encourage tax evasion, but I suspect that before the issue of this document,
most employers would not have dreamt that a bouquet of flowers sent to an
employee on the event of her baby’s birth is a benefit in kind. It was held by the Upper Tribunal in HMRC v
Apollo Fuels Ltd that the benefits provisions apply not where a person makes a
payment in relation to an employee but only where the employee actually
receives a benefit. I doubt that anyone
feels they have benefitted from a bouquet of flowers from the office. It is nice to know that they are thinking of
you (or not, if you regard it as a reminder that they expect you to come back
to work) but that is surely not a benefit, so it is doubtful whether it is
legally a taxable benefit at all.

Nevertheless,
if the government want to formally exempt things that in practice most people
probably already regard as exempt, surely no one is going to complain.

But the
government does not propose to exempt trivial benefits; it proposes to exempt
them only up to a limit. It believes
(presumably) that if it simply exempts them, employers will start to send
bouquets of flowers all over the place – they will not only send a bouquet for
the birth of a baby, but will send a bouquet on its every birthday, on the
employee’s anniversary of starting work, on the employee’s own birthday and
wedding anniversary, on her return from holiday and on myriad other
occasions. If the government were to
simply exempt trivial benefits, the whole country could quickly become
overwhelmed with flowers. Clearly firm
government is needed to prevent this happening.
The desire for tax simplification needs to be balanced against the risk
of civil unrest that would be bound to ensue if some employees were to receive
more flowers than others because they have more anniversaries than the norm.

The document
tells us that “the government believes that employers and employees will
welcome the certainty and transparency that the inclusion of a monetary limit
in the definition of a trivial Bik will provide and therefore intends to set
such a limit”. So it is your fault! Somehow you have convinced the government
that is what you want! (It’s not my fault because I am neither an employer nor
an employee).

HMRC have
put forward two possible ways to meet your wish.

Annual exemption

1.The employer decides whether a
benefit is trivial.

2.He records the cost of every trivial
benefit that he provides (not just flowers but anything of small value (other
than cash and items already exempted from tax)).

3.He keeps a running total of that cost
for each individual employee.

4.The trivial benefit that breaches the
annual exemption – perhaps £75 – will be taxable as will any subsequent
benefits that would breach it.

Number of trivial benefits

1.The employer decides whether a
benefit is trivial.

2.He records for each employee that
fact that he has provided a trivial benefit.

3.He keeps a running total of the number
of benefits for each individual employee.

4.A benefit that breaches the allowable
number (HMRC suggest 2 must be a reasonable number) is taxable.

Which of
these methods did you have in mind when welcoming certainty and transparency?

Both seem to
me to involve a lot of work for employers.
But perhaps simplification is really about reducing the burdens on HMRC
rather than reducing burdens on business.

Obviously,
to further deter avoidance the government intend to define what is
trivial. They don’t want to create a
list of trivial items. It will be
principles based. The law will set out a
number of principles. In that way, each
time an employer provides a trivial benefit (HMRC seem to have in mind
something costing £30 or less – although I doubt that you can get a decent
bouquet for £30) he can consider these principles and decide whether or not the
benefit is a trivial one. He will of
course face a penalty if he gets it wrong unless he can show that he exercised
reasonable care in giving proper consideration to the guiding principles.

But if that
is what employers and employees both want, far be it for me to seek to
interfere with the fulfilment of this desire.